2/01/2008 @ 6:30AM

It's the Dollar, Stupid (and Taxes, Too)

Uh-oh. Washington wants a stimulus package to rejuvenate the slowing U.S. economy. Usually such programs are full of nice-sounding but wasteful spending initiatives, as well as tax breaks that have a weak, one-shot impact on the economy. President Bush should therefore offer a deal: strong, pro-growth measures as the price for signing off on the usual unproductive stuff. But the White House has panicked and will go for things that won’t solve the problems plaguing us. The President should recover his nerve and verve. Otherwise, he will blast away a positive economic legacy.

The most potent, constructive medicine would be for the Bush Administration to stop its Jimmy Carter-like weakening of the dollar. A feeble dollar means inflation–witness what’s happened to commodity prices over the last four years, the most prominent being oil, which has almost quadrupled in price. This ain’t a case of supply and demand. Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10 barrels–that’s hardly a 300% real price increase. A weak dollar also brings about economic distortions, such as the (now disastrous) subprime mortgage orgy. President Bush should announce that we will defend the dollar and make it stronger. The Fed should announce that it will let the federal funds interest rate float, at the same time removing some of the excess money it created in 2004–05.

The bottom line: No strong economy has a weak currency.

An additional and powerful shot in the arm would be to make permanent–and, indeed, deepen–the tax cuts on dividends and interest that expire in 2010. Reduce the levy on dividends and capital gains from 15% to 10% and you’d see a sharp boost in equity markets, as well as in consumer and business confidence. Business capital outlays would boom, as would entrepreneurial startups.

Former Bush economic adviser Larry Lindsey recently came up with a good idea in the Wall Street Journal to unclog the tightening credit arteries: Allow manufacturers and retailers to open up their own in-house banks or financial institutions that could borrow and lend money. These entities could make loans to customers that now frightened banks are increasingly loath to make. Unfortunately, approval for this type of entity has been paralyzed by the fight over
Wal-Mart
‘s attempt to open such a bank. Unions and banks opposed it, and the proposal has languished.

Congressional Democrats instinctively oppose things that actually facilitate progress. They’ll howl that all of these proposals are a giveaway to the rich. So in exchange for the good stuff, give them some of their pet projects in return; for example, one-time rebates of the kind George Bush issued in 2001 and Gerald Ford in 1975.

The Democrats will want some other programs, such as temporary aid to states for housing assistance. These things are well worth the price for the short- and long-term power of tax-rate reduction, sound currency and unclogged credit arteries.

Pernicious Pretension

Why is there an almost universal dogma that governments can play significantly positive roles in economic activity, that they can fine-tune economic activity and prevent excesses and cushion downturns?

It’s a colossal conceit, and one that does immeasurable harm. Economies are not like engines that can be mechanically manipulated to run better. To hear all the chatter about tax rebates, for example, you’d think they were the equivalent of recharging your car’s dead battery.

In fact, it’s usually government actions that cause destructive economic troubles and excesses. The Great Depression, for instance, is always cited as prima facie proof as to why we need active government involvement. To the contrary, government blundering brought on the disaster, starting with the Smoot-Hawley Tariff of 1929–30, which began a devastating trade war that, in turn, dried up international trade and flows of global capital. That horrible error was compounded in the U.S. by Herbert Hoover’s massive tax increase to balance the budget in 1932. Hoover thought a balanced budget would revive confidence. Instead, the deficit ballooned, as the high taxes deepened the slump. Compounding Hoover’s errors, Franklin Roosevelt retarded recovery through major tax increases and destructive regulatory meddling. For the first and only time in our history a recovery didn’t surpass the peak of the previous economic expansion.

The horrific inflation that racked the U.S. and most of the world in the 1970s and early 1980s was clearly the result of excess money creation by the Federal Reserve, abetted by other central banks. President Richard Nixon cut the U.S. dollar from gold in 1971, and central banks floundered.

As for the cures for economic contractions, government spending isn’t one of them. Franklin Roosevelt repeatedly “primed the pump” with government spending and job-creation programs in the 1930s–to little avail.

Japan repeatedly enacted stimulus packages during its 15-year quasi-recession, from the late 1980s to the early part of the new millennium–futilely.

If government spending was the way to wealth, the Soviet Union would have won the Cold War.

What governments can do is create environments in which entrepreneurial activity can flourish–a sane legal system with property rights, low taxes, sound money and minimal barriers to doing business. But rebates and “emergency” spending measures, or the Fed playing with interest rates to encourage or discourage economic activity? Bah, humbug.

Reagan Would Applaud

Rudy Giuliani unveiled a tax cut/tax simplification proposal recently that is the most sweeping and exciting since the days of Ronald Reagan. The personal income tax rate would be cut sig- nificantly. The corporate tax rate would be whacked from 35% to 25%, and the capital gains levy would be reduced by a third to 10%. Capital gains would also be indexed for inflation–no more paying taxes on phony gains. There would be tax-free savings vehicles for individuals; the Alternative Minimum Tax would be indexed for inflation and ultimately eliminated; and the death tax would be buried once and for all. An eye-opening feature is Giuliani’s one-page income tax form. If you wished, you could literally fill out your income tax return in less than 20 minutes.

While not a pure flat tax, this is an enormous step in that direction.

Giuliani recognizes that our tax on business profits is now the second highest in the developed world and that encouraging risk taking by reducing the capital gains tax burden will quicken innovation. He also knows that tax simplification will free an incalculable amount of brain power for use in more productive pursuits.

Can Giuliani get this done with the Democrats likely to control one or both houses in Congress? His record as Mayor of New York City offers real encouragement that he could achieve a significant chunk of it. Even though Democrats controlled the New York City Council by a 45-to-6 margin, Giuliani was able not only to keep spending below the rate of inflation and reduce the size of the city bureaucracy but also to cut taxes 23 different times, including the city’s income tax rates by 23% (which led to income tax receipts going up nearly 50%). As did Ronald Reagan, Rudy knows how to rally public opinion and to negotiate and horse-trade with his political adversaries.

One How-To and One Whodunit

Cut Carbon, Grow Profits: Business Strategies for Managing Climate Change and Sustainability–edited by Dr. Kenny Tang and Ruth Yeoh (Middlesex University Press, $80). Concerned about climate change? Then you will find this book timely and useful. The editors have brought together essays from numerous experts that provide an overview, as well as more nitty-gritty approaches that businesses can take to reduce carbon dioxide emissions and make money at the same time. Because their examples focus on the bottom line, Tang and Yeoh feel these comprehensive contributions will win a growing audience in corporate executive suites, not only in Europe and the U.S. but also in Asia, where there has been less green consciousness. A number of the contributors focus on real-life examples of various corporate actions that the editors rightly believe will be powerful persuaders and models for other policymakers in the corporate world.

T is for Trespass–by Sue Grafton (G.P. Putnam’s Sons, $26.95). Here’s a thriller that painfully reminds us of how vulnerable many of us will become as we get older and are hit with chronic conditions that require in-home care. Grafton, who consistently turns out grade-A novels, has outdone herself with her latest.

This chilling, poignant tale involves an injured 89-year-old man who ends up with a caregiver who decides to kill him slowly by poisoning his food. The fellow has only one known relative, who is far away and doesn’t want to get involved. The scheming caregiver, as she has done with other victims, shrewdly knows how to keep the elderly man isolated from concerned neighbors, including our private-eye heroine, Kinsey Millhone. We get Kinsey’s usual first-person case account but, in a shift for Grafton, we are also unnervingly brought into the amoral mind of the villain.